More on US Allies: America’s ‘Exorbitant Privilege’ means it can borrow to Sustain Hegemony Longer than Anyone Ever Expected

Two of my posts this week (one, two) on hypothetical retrenchment under Ron Paul got a lot of traffic and comments. A hat-tip goes to Andrew Sullivan for citing me; if you don’t read Sullivan already, you should. Given the large numbers of comments, both here and elsewhere, I thought I would try to capture some of the concerns generally. This post focuses on the surprisingly low likelihood of retrenchment; a second, in a few days, will look at specific countries mentioned by commenters.

The OP was intended as an emergency exercise if the US were to face a truly significant crisis that forced retrenchment. The purpose was to ask who are the most important US allies and commitments if we were forced to choose. Right now, the US is not choosing. We are all over the place; if anything, we are taking on more commitments (Iraq, Afghanistan, Pakistan, Yemen, the Asian pivot). As I tried to say in the second post, I don’t think we are about to pull out of Japan or Egypt, but if we get to the point where we really can’t afford globe-spanning hegemony anymore, it would be help to try to prioritize what is genuinely strategically necessary, from what are ‘extras.’ One doesn’t hear this much, except for Ron Paul, whose debate performances motivated the post.

On this point, I should say that the bifurcation of the OP into two parts was not to indicate the those in part 2 should get the axe; it was just a matter of convenience. The point of the OP was to try to force a ranking – who is more important to the US than who? This is why I tried to limit the listees to a conventional ‘top 10.’ To go beyond that tight focus, would get us back into the global alliance sprawl the US is in now.

The above point raises the next, obvious question about whether we are therefore getting to a point of forced US retrenchment. There is a whole declinist literature that emphasizes long-term US problems, like atrocious public finances, too many wars, bad public schools, political gridlock, rising anti-Americanism in the world, etc. Zakaria’s ‘post-American world’ captures are lot of this, and apparently the Chinese believe the US is in decline too. Probably the best I can think of at the moment is Gideon Rachman’s take.

I go back and forthon this myself. The economist in me finds it hard to imagine how the US can borrow $1-1.5T a year and stay on top. We’re borrowing around 9% (!) of GDP per annum, and the IMF calculates America’s debt-to-GDP ratio is 100% already (if you include state debts; it’s 75% now at just the federal level.) I wonder how we can fight so many wars without national exhaustion and diversion of investment from domestic priorities like infrastructure or health care. Signal markers in the decline and fall of empires are heavy borrowing and lots of wars which sounds a lot like us, no?

That said, I am constantly amazed (and intellectually perplexed) that foreigners seem to have an unquenchable thirst for dollars. This is the big reason why all those claims that the US would collapse under its debt burden have never materialized. Longstanding lefty critics of US foreign policy, like Noam Chomsky, Johann Galtung, or Walter LaFeber, have been saying this stuff since Vietnam, and it doesn’t happen. (Continental Europeans particularly seem to relish predicting US decline.) I am genuinely amazed the catastrophic one-two punch of the Great Recession and the flown-badly-off-the-rails GWoT in less than a decade did not dramatically set-back US power. Remember when S&P downgraded the US last summer, and yet the very next day, US interest rates went down as everyone fled to the greenback safe-haven? America’s ‘exorbitant privilege’ of printing the reserve currency is even more exorbitant than anyone ever expected.

I remember last decade, when people said the Bush administration’s $400B annual borrowing was unsustainable. Yet for the last 5 years, we borrowed triple that, with another decade projected at that level – but with the lowest interest rates in US history! If your head feels like it is about to explode for sheer perplexity, yes – me too.

America’s ability to borrow, and thereby forestall retrenchment, is simply astonishing. The rate on the US 10-year T-bill is at anall-time low of 1.44%. If you factor in inflation across the ten-year maturity life-span, the borrower actually loses money! So If you want to know one big reason why the US fights so many wars, here you go: because we can, because foreigners make it so easy by practically begging us to take their money. It’s surreal how cheap we can borrow.

Krugman makes this really good point in his latest op-ed: “none of the disasters Republicans predicted have come to pass. Remember all those assertions that budget deficits would lead to soaring interest rates? Well, U.S. borrowing costs have just hit a record low. And remember those dire warnings about inflation and the “debasement” of the dollar? Well, inflation remains low, and the dollar has been stronger than it was in the Bush years.” My own deficit-hawk instincts say conservatives are right about the debt build-up, but in fact, Krugman has been borne out. So why not fight more wars (at least by economic criteria) when they are so cheap? Foreigners seem endlessly willing to fund our wars, which I find so bizarre and inexplicable that I wouldn’t believe it unless it were the reality around us right now.

Worse, for the declinist, retrenchment-will-be-forced-on-the-US position is, that the euro-crisis continues to make the US dollar a preferred safe-haven (so lowering US borrowing costs), that China must continue to lend to the US in order to hold-up the value of its current $3T+ reserves (again pushing down US borrowing costs, no matter how many commitments we take on), and finally that a growing body of evidence suggests that China cannot continue its astonishing growth levels without serious reform. Wen Jiabao himself said that China risks turmoil on the scale of the Cultural Revolution (!) without major changes. I tried to argue this also in the second half of the OP. If China slows, that automatically buys US hegemony a breather, because position in international politics is relative: if China slows, then the US recovers. And it is increasingly obvious that there are lots of ways China could derail in the next 2 decades: whether through tightening environmental and demographic caps on growth, from political or democratic transition turmoil, by scaring its neighbors so much that they line-up to contain it.

In short, US hegemony and alliance sprawl is turning out to be a lot more durable during this period when the US is seemingly on the ropes, than I thought. In fact, I think a lot of people are amazed at the staggering ability of the US to borrow and keep our global hegemony rolling along. The US is exploiting its ‘exorbitant privilege’ worse than at any other time in its history – and the inflation-adjusted cost is zero!!! I just can’t figure that out, or what that means…